Three firms, Direxion Shares ETF Trust, Exchange Listed Funds Trust and ProShares Trust had all filed for permission to create ETFs in the past month. Even though none of the funds would have directly held bitcoins the SEC asked them to withdraw the applications until concerns of the SEC about the liquidity and valuation of bitcoins are resolved.
The price movements of the ETF's would be driven by changes in prices in the two bitcoin futures markets that are now operating, the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME). All three companies recently wrote letters to the SEC withdrawing their applications after feedback from the SEC.
The secretary of Direxion wrote: "On a call with the Staff on January 5, 2018, the Staff expressed concerns regarding the liquidity and valuation of the underlying instruments in which the Fund intends to primarily invest and requested that the Trust withdraw the Amendment until such time as these concerns are resolved. In response to the Staff's request, the Trust respectfully requests withdrawal of the Amendment." "Staff" refers to staff of the SEC.
The letter from ProShares had similar language saying that the letter requesting withdrawal came from a request from the Staff according to Richard Morris, general counsel and secretary for ProShares. However,
he also wrote: "The timing of these withdrawals is notable, given that the SEC just released two other rule change proposals which could allow for a bitcoin ETF last week. Those proposals, filed by the Chicago Board Options Exchange (Cboe), would exempt its proposed ETFs from several market manipulation rules which govern traditional assets. The SEC is seeking public input on the proposals." Both of the rule changes noted that bitcoin did not behave like traditional assets.
The SEC has released the CBOE proposals for public comment. However, the SEC has a long history of asking for withdrawals of proposals for bitcoin ETFs. A number of organisations withdrew ETF proposals last year at the request of the SEC. But at least 2 proposals were denied because no bitcoin future contracts were available at the time. Given now two exchanges trade bitcoin futures no doubt many felt that ETF's would now be allowed by the SEC
Some analysts thought now there are bitcoin futures trading there would be ETFs
ProShares announced last September that it wanted to launch bitcoin-based ETFs before there were any exchanges trading bitcoin futures. Industry watchers thought that futures trading would provide the impetus to approve ETFs since this would set a concrete price level to value the funds.
ProShares is the tenth largest ETF provider with $29.5 million under its management within the $3.5 trillion industry.
Direxion Asset Management had proposed a set of ETFs that would allow investors to capture multiples of the performance of bitrcoin futures. The four funds would deliver 1, 1,25, 1.5, and 2 times the return either higher or lower. One strategist called the proposal insane. The firm has almost $13 billion of assets under management.
Futures contracts and ETFs have different regulators
The SEC regulates ETFs, while Commodity Futures Trading Commission (CFTC)regulates futures contracts. The CFTC has been under some pressure to deal with concerns that it did not fully address risks that bitcoin poses to the financial system. Regulators have been struggling with how to deal bitcoin as a new asset class.
Bitcoin can be used to move money around the world quickly and relatively anonymously. There is no need for a central authority such as a bank or government to be involved in the transaction. This no doubt concerns authorities but is also one of the virtues of the system as far as some of its libertarian supporters are concerned.
The volatility of bitcoin's price is seen as a problem by many. Over the last two years bitcoin has lost more than ten percent on a single day 26 different times. Some still expect that there will be bitcoin futures-based ETFs some time this year.
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